Health care costs in the United States have spiraled outof control while providing citizens with some of the poorestoutcomes in the developed world. According to the World HealthOrganization, the per-capita total expenditure on health care byU.S. citizens in 2012 was $8,895. By comparison, using a countryroughly the same size, on the same continent and in the samehemisphere, Canadian citizens spent $4,676 and were significantlyless likely to die between the ages of 15 and 60 (83 men and 52women per 1,000 in Canada compared with 130 men and 77 women per1,000 in the United States).

Everyone who has anything to do with the U.S. health careindustry is aware of numbers like these thrown around whendescribing the crisis that faces this country. Critics of thefee-for-service model of paying providers argue fee-for-servicepayments force providers to increase the volume of procedures orvisits in a day, and as a result, the value each patient receivesis diluted.

“The concern has been that health care costs in the UnitedStates continue to rise at an alarming rate,” says Mark Bogen,senior vice president of finance and chief financial officer atSouth Nassau Communities Hospital. “When you overlay that increasein cost year-to-year, you see that not only is it taking up agreater portion of the gross national product, but when economistsand health care gurus and policy wonks compare the results of allthat spending against other industrialized countries in terms ofvarious benchmarks and indicators for quality of health care, welag far behind. So generally speaking, the only way to getproviders' attention to deal with that problem is to impact the wayall health care providers—hospitals, nursing homes, post-acute caresettings as well as physicians—“get paid.”

So payers—from the Centers to Medicare & Medicaid Servicesto all of the major commercial health insurance carriers—have beenlooking at value-based payment models as a solution to this crisis.When health care reform is discussed in the future, it'sincreasingly likely to be synonymous with “value-basedpayment.”

Navigating the tide

The concept behind value-based payment is simple: Instead ofbeing paid for each service, health care providers will instead bepaid based on patient outcomes. Like any seemingly simple solutionto a health care problem, it's surrounded by a massive cloud ofargument and disagreement.

Although fee-for-service remains the overwhelmingly popularpayment methodology, CMS has established various value-basedpayment models, such as bundled payment programs, accountable careorganizations and shared-savings programs, plus many more examples,and other payers also have jumped into the value-based payment poolwith abandon. Right now, the industry is in a state of wildexperimentation; it's a living laboratory, and one phrase emergesover and over: “throwing spaghetti at the wall to see whatsticks.”

“There are many different types of value-based programs in themarket,” explains Carl Rathjen, manager of network strategy andprogram development at Horizon Blue Cross Blue Shield of NewJersey. “Some are focused on improving overall population healthmanagement, which is a core goal of the patient-centered medicalhomes and accountable care organizations. At a high level,population-based programs are focused on improving carecoordination, targeting our most at-risk members, and working withprimary care providers to engage and empower those patients. Wealso have additional initiatives that focus on specific procedures,like a hip or knee replacement, which is an episode-of-careprogram.”

“The models we see today aren't the models we'll see nine monthsfrom now—or 12, or 18 months from now,” says Ray Desrochers,executive vice president at HealthEdge. “There's a tremendousamount of turmoil and chaos in this space. Demonstrated successfrom both payers and providers using these new models likely willlead to even more changes and new approaches.”

“There was a similar flurry of activity in the industry when theClintons were trying to enact health care reform,” explains DavidNace, MD, vice president of clinical development and medicaldirector at McKesson Health Solutions. “But the model was differentthen, and the timing wasn't right. We didn't have the experiencethat we would need in pilot programs or the technology to be ableto carry those programs out. We needed data, and we needed to beable to connect people. Now a lot of time has passed, and we're atit again because the cost of care is unsustainable.”

McKesson's benchmark study, “The State of Value-BasedReimbursement and the Transition from Volume to Value in 2014,” wasreleased in June, and Nace notes that although high-value care isless costly to deliver, coordination is vital to achieve thatvalue.

“We know so clearly that higher-value care—more preventive care,more evidence-based care, more patient-centered care where thepatient is engaged—is usually dramatically cheaper to deliver,” hesays. “Changing the way health care is paid for is inextricablytied to the way care is delivered, and we saw that in the study.Payers expect care to be delivered differently: more coordinated,more evidence-based, more collaborative and more patient-centered.And the expectation of the provider is that if they change the waythey deliver care, they will be paid differently, and to theiradvantage.”

Although most experts agree that aiming for higher value inhealth care is a good thing, how value is defined, measured andpaid for are topics of fierce debate in the industry. “You go tothe hospital because you don't feel well and you want to feelbetter,” explains Scott Wallace, a visiting professor of family andcommunity medicine at Dartmouth's Geisl School of Medicine. “So thequestion is, how much better do you get for the cost of making youbetter? That's the essential definition of value.”

Troubled waters

Wallace notes that not every program that's labeled“value-based” is actually shifting health care outcomes. “Somewherealong the road, someone decided that 'value' was a polite code wordfor 'cost-shifting,'” he says, “and these payers might be makingmore money because they're forcing consumers to pay more, orthey're getting consumers to use less care. But there's no evidencethat subscribers are in fact getting healthier because of thechanges being made, and from a business standpoint, it's reallyimportant that your subscribers get healthier, because people whoare healthier use fewer health care resources than people who aresick. Health is a really important strategic objective for healthplans, but they're just now coming around to it.”

One strategy that Wallace has seen health plans use to increaseearning reports is changing copays, charging more for access tocare. “If you require people to pay more for care, then people useless care,” he says. “If they're no longer using care that wasunnecessary in the first place, that's a good thing. But if they'renot getting care that they needed and that was high-value, that's abad thing.

“Some health plans over time aren't tracking these outcomes,” headds. “They aren't looking at whether consumers are gettinghealthier; they're looking at how much they spent—and that'sdangerous.”

Furthermore, some experts believe that the true foundationalproblem with our health care system isn't how providers are paid,it's how system resources are used. “Health care costs aren'tescalating because of the fee-for-service problem,” says MindaWilson, founder of Affordable Healthcare Review. “It's a differentsystemic problem than that. You have to look at data about howpeople use the health care system, when they use the health caresystem, and who's their point of contact when they come into thehealth care system.”

The lack of collaboration and alignment currently present in thesystem is a problem, and a huge frustration for providers, payersand consumers alike. But until recently, most providers weren'tbeing incentivized to coordinate patient care—and if they weren'tbeing paid to do it, then why do it? Payers are experimenting withways to compensate providers for care coordination, and althoughinnovative strides are being made in this area of health care, thenecessary infrastructure to facilitate collaboration and alignmentis woefully incomplete.

And care coordination oftentimes requires much more thanmanaging a patient's health record. “What we're really talkingabout in many cases is a much broader web of socio-economic itemsthat impact the health of a population, which heretofore have neverbeen in the purview of health care providers,” Bogen explains.“Things like housing, jobs, transportation, diet—there is a wholehost of variables that had historically been the purview of thepublic health sector, and the responsibility for managing thosevariables is being pushed onto hospitals and physicians who mightnot have the experience or the resources to be able to successfullyhandle them.

“There's a need for a tremendous investment in infrastructure,”he adds. “Care coordination, care management, informationtechnology and other requirements—we call these types of things'unfunded mandates,' because in order to get or keep revenue at theend of the game, you have to make significant dollar investments atthe beginning, and you're at risk for most of that unless you canproduce the results. And hospitals and providers in general areoperating under such slim margins, so it's very difficult to findall this money to build the health care system of the future.”

Yet another problem with value-based purchasing is that in orderto structure a value-based payment, payers must define and measureprovider quality, so payers must collect data about contractedproviders to ascertain whether the given provider is high-qualityand therefore high-value for the consumer. Predictably, the metricsused to measure provider quality for Medicare are not the samemetrics that commercial payers use—and each commercial payer hasslightly different metrics. This is a dizzying conundrum formedical administrators, who find themselves keeping track ofmultiple data points across patient populations for each payer.

And agreeing on the metrics that define quality is one morelayer of labyrinth to navigate. One popular method of qualitymeasurement is defining “best practices” for a specific procedure,often a step-by-step checklist, and providers are evaluated basedon their adherence to the outlined protocol.

“Quality is being defined as process compliance,” Wallaceexplains. “So payers are measuring the quality of providerorganizations based on audits they do to see, for example, whetherall of the clinicians are washing their hands. And that's thequality measure—the percentage of clinicians who wash their handsbefore touching a patient is a measure of quality. And that soundsgreat. But beyond the aesthetic, what we should care about is, didthe patient get sick? Did the patient get an infection from thedoctor?”

Using the previous example, although hand-washing is a goodthing in and of itself, it isn't the be-all, end-all of clinicalhygiene. A clinician who follows strict hand-washing procedures butdoesn't launder a lab coat or tie for a week —or a clinician who'spulling out a germ-contaminated cell phone to use in betweenhand-washings—is still going to be an infection risk for a sickpatient.

“The difference between a process measure and a health outcomeis really, really important,” Wallace emphasizes.

“We don't have industry standards yet for many of thesemeasures,” says Jennifer Searfoss, founder of Searfoss ConsultingGroup, “and especially not the outcome measures. That continues tobe a problem.

“The question becomes, why is this hard?” she continues. “Tryingto get any two physicians to agree on anything is like gettinglawyers to agree. We have to actually move to evidence-basedmedicine, with peer-reviewed, accepted protocols forprocedures.”

And although care standardization works well for many medicalprocedures, it's not always possible. “The problem is that somecare can't really be standardized,” Wilson says. “In some ways,people are unique and have unique issues related to theirhealth.”

Searfoss sees two more major issues with value-based paymentmodels. “Another problem is data—because of interoperabilityissues, it's typically transmitted in an Excel spreadsheet. Soyou're getting stale data that's easily corruptible if somebodyaccidentally moves a column, for example. There are major problemswith the data that makes it unusable. And the third thing is thatdoctors oftentimes will think they have a system that can trackwhatever they're trying to do, and they might not. You're only assavvy as your system, and there are certain systems that don'tallow you to pull out near-time data in a usable format.”

“One of the worst-kept secrets in the industry is that manypayers are running on old technology—systems that are 20, 25, 30years old,” Desrochers says. “A lot of these organizations arehaving trouble getting these systems to administer value-basedmodels. And providers are having the same issues, as the majorityof the practice management systems that they are currently usingweren't designed for any of this.”

“Another issue with figuring out the right quality metrics isthat payers are trying to measure things like patient experience,”Wilson says. “And the things that go into a patient experiencemight not be related to the success of the patient's procedure orthe quality of care the patient received, it might be related towhether or not a nurse had a bad day—or it might be a function ofthe patient's own inability to communicate. Maybe you have anarticulate, communicative patient versus a withdrawn,non-communicative patient. And you can't fire the nurse for havinga bad day.”

And as all of these shifts and changes are happening to theindustry landscape, health care providers are still beingcompensated primarily through fee-for-service reimbursement, sothey must also manage their business as usual in the midst ofchaos.

“We're in a transition period,” notes Bogen, “so providers haveone foot on the dock and one foot on a moving boat, so tospeak—they have to keep one foot in the present system, which isstill primarily a volume-based reimbursement system, and as theindustry transitions, they'll have to move into the value-basedpayment systems. It's not easy from a provider standpoint.”

Safe harbor

Although no one yet knows where the sea change of value-basedpayment is headed, there's no doubt that this is a trend withlongevity.

“I think there will continue to be an ongoing movement to rewardcare providers for maintaining health rather than treatingsickness, and we'll find new and better ways to structure paymentsaround keeping people healthy,” Wallace says.

Annette Dowdle, president of the employee benefits practice atHub International, notes that brokers should know the ins and outsof value-based payments because it's going to impact clients.“Brokers need to understand how value-based payment works, what thepotential savings and shortcomings of such an arrangement are tothe client, and the incentive basis on which the providers aregetting paid. There needs to be a philosophical alignment betweenthe structure of the payment and the culture of the client,” shesays. “And if an employer is looking at two possible insuranceproviders, one with a value-based contract and one without, thebroker will need to be able to explain those two contracts to theclient, in detail and with different cost scenarios.”

Joe Kuehn, a partner in the health care practice at KPMG, saysthat understanding how value-based payment work is key for brokersbecause value-based payments eventually affect everything fromnetworks to premiums. “Brokers should understand how health plansare adjusting to this new normal and what behavioral incentives arebeing used in their benefit plans, designed to encourage compliancewith care management and care coordination efforts and make us moreresponsible for our own health. And as these contracts take holdand savings are being generated, providers are benefiting becausethey're reducing costs, and health plans are benefiting becauseclaims payments are being reduced, and potentially, premiums arenot going up as quickly—or at all. And that should translate backto the employer or whomever is purchasing that insurance planthrough that broker. It might also mean a change in commissions forthe broker.”